A Brief Introduction to Public Finance
Public finance is a term used for finances managed by the government and other government-affiliated organizations. It takes an eye on the roles and responsibilities of the government towards the country’s economy. The country’s revenue, debts, and expenditures are monitored under public finance.
Key Elements of Public Finance
Public finance is a broader niche that includes the following subcategories:
Tax Collection: The government retrieves the majority of its revenue through taxes. This includes income tax, sales tax, property tax, estate tax, etc. Another way to generate income for the nation is via public services that don’t come free of cost, for instance, public transportation.
Budgeting: Budgeting is the key to getting an articulate idea of the expenditures intended for the betterment of the country. It helps the government strike a perfect balance between the revenue generated and the expenses intended. For instance, in the U.S. the Congress attains a budget request from the President while the Senate and the House crafts bills targeting particular aspects of the budget. The final step includes the president signing the bill into law.
Expenditure: Expenditure is all the money that the government spends for the development of the country. This includes revenue spent on education, infrastructure, and social programs. The expenditures are used in the form of wealth redistribution with a mindset to benefit society. The expenses may or may not exceed the country’s budget.
Deficit/Surplus: The government faces a deficit year if the country’s expenditure exceeds the budget. On the other hand, the government witnesses a surplus year if the expenditures are less than the total budget.
National Debt: During times when the government faces a deficit budget it needs to issue a national debt wherein, they borrow money to fund the difference. It is the responsibility of the U.S. Treasury to issue a national debt while the Office of Debt Management i.e., ODM is responsible for making decisions about selling government securities to funders and investors. For instance, in 2017, the revenue generated by the U.S. government was $3.3 trillion while their expenditure was $3.97 trillion. Hence, they faced a deficit financial year and had to issue a national debt.
Federal Finance: Federal finance is a system that involves the articulate distribution of the revenue source among the State and Central Government for effective execution of their respective duties.
Financial Administration: Public finance administration includes concerns related to raising funds, allocating those funds and other resources, and public asset management.
Steps Involved in Public Finance Management
The government needs to appropriately collect and manage revenue by prioritizing the tasks they need to spend on. They have to use the resources effectively and efficiently to conduct excellent finance management. The essential components of public finance management include the following:
1. Resource generation, for instance, raising funds from the public via taxes.
2. Resource allocation i.e., distributing the resources among the government bodies for smooth execution.
3. Resource utilization i.e., using the resources or income to benefit the society by prioritizing their use towards a particular task.